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Taking the Bite Out of Zoning

A property is often acquired for the purpose of continuing the existing use of the property, redeveloping an existing building(s) for a new purpose or developing a vacant site. In any of these cases, it is prudent to make the agreement of purchase and sale conditional on confirming the property zoning permits the existing or proposed use. It is also prudent to obtain competent legal and planning advice early on in the process.

The recent Ontario Superior Court decision of Meron v 2182804 Ontario Ltd., illustrates the impact zoning regulations may have on the use of a building and how an unconditioned offer can prejudice a buyer. The case also highlights the need to do more than rely on general oral statements made by a property seller or preliminary municipal responses when deciding whether to proceed with a transaction.

In the Meron case, the buyer brought an action for return of deposit and damages from the property owner for breach of the purchase agreement. The buyer’s action was dismissed. The seller’s counter claim against the buyer for failing to close the transaction was successful.

The purchase price of the property was $3.5 million. The seller required the offer to purchase to be free of conditions. The agreement was drafted by the buyer’s agent.

The buyer alleged a representative of the seller made the following representations before the agreement was signed:

that the property could be used as a restaurant and there would be no issues with the City of Toronto providing approval for such use; and

if for any reason the property could not be used as a restaurant, the representative of the defendant (or possibly the representative personally) would return the deposit and purchase the property back from the buyer.

The seller denied making either representation.

Before the agreement was signed, the buyer was informed by the City Planning Department there would be no problem with respect to zoning and the proposed restaurant.

The agreement had no warranties or representations with respect to zoning of the property.

Before closing the buyer was advised by the City that the building only allowed for a 2,000 square foot restaurant and not the proposed 4,000 square foot restaurant. It became clear the buyer would not be able to proceed with the proposed 4,000 square foot restaurant. The transaction did not close. The mortgagee of the property then exercised its power of sale and sold the property.

The buyer submitted it relied on the seller’s oral representation about returning the deposit and repurchasing the property if the proposed restaurant was not approved. The buyer argued this gave rise to a collateral agreement to the agreement of purchase and sale.

The Court found that the seller may have made a general representation that the property could be used as a restaurant but there had been no representation as to the permitted size of such restaurant

As stated above, the buyer checked with the City before signing the offer to purchase to determine if the zoning would allow for a restaurant. The City provided information that appeared to satisfy the inquiry of the buyer . It was found the buyer relied on the information provided by the City and not the assurance made by the representative of the seller with respect to zoning.

The buyer did not consult a lawyer before presenting the agreement.

The Court was not persuaded the seller had promised to return the deposit and repurchase the property if the proposed restaurant was not permitted.

The Court found the alleged representations lacked clarity in any event and refused to find the existence of any collateral agreement as alleged.

The seller brought a counter claim against the buyer for damages resulting from the failure of the buyer to close the transaction.

The take away

This case illustrates how important it is for a buyer to not rely solely on oral representations about a property’s zoning compliance from anyone, be it the seller or the municipality.

We suggest that for significant transactions, such as the one described in this case, a buyer should retain a competent planning firm to investigate the property and provide a report on significant items such as zoning so that a buyer does not end up with a property that can’t be used for the buyer’s intended purpose.

The buyer should do this before submitting the offer to purchase or, as is more typical, have the agreement of purchase and sale conditional for a reasonable period of time upon being satisfied with the property zoning.

The agreement of purchase and sale language needs to be very clear as to what is desired by the buyer.

Sometimes, as in the Meron case, the seller will not consider a conditional offer. This forces a buyer to clearly confirm the zoning before submitting the offer to purchase, walk away from the property, or take its chances. Unfortunately for the buyer in the Meron case the decision to take its chances did not work out.

A buyer should also have the offer to purchase either prepared or reviewed by a lawyer with the appropriate level of applicable experience . Some realtors do not have the necessary experience or skill to properly draft such an agreement.